Sales tax compliance is a critical aspect that manufacturers must prioritize to ensure adherence to tax regulations and minimize potential risks. From tracking thousands of SKU numbers to keeping up with who is exempt and who isn’t, manufacturers face plenty of sales and use tax challenges. These challenges place manufacturers at a higher risk of sales and use tax audits. This is why, as both product producers and distributors, manufacturers benefit from having a clear, consistent, and repeatable process to help encourage quality control and compliance.
How Can A Routine Help Manufactures Manage Sales Tax?
When Keeping Up with Sales Tax Exempt Retailers:
Processes keep people organized and things under control — things like important documents. Sales made for resale to consumers can be exempt from sales tax collection under a resale exemption. The most common way of proving sales tax exemption is by having an exemption certificate. Distributors are responsible for collecting, maintaining, and continually updating exemption documentation for all their resellers. In the event of an audit, it will be the distributor who suffers for incomplete records.
Create routines that help your team manage sales tax exemption certificates:
- Include a check box on invoices that reminds sales team members to collect valid exemption certificates
- Provide training to sales team members on how to identify valid exemption certificates
- Create a filing routine and system for exemption certificates
- Check the validity of exemption certificates on file periodically
When Selling Direct to Taxable Consumers:
As internet commerce becomes more commonplace, many manufacturers are stepping into the shoes of retailers and selling directly to consumers. While this is a great opportunity for businesses, it presents the new challenge of managing online sales tax. When selling directly to online consumers a functional and accurate online interface is needed to sell your parts and products. You must make sure the correct rates are used for every taxable sale. Auditors do not look kindly on mistakes and sales tax errors can be costly.
Plan systems that help manage sales tax online:
- Invest in reliable and accurate sales tax compliance software
- Train team members on how sales tax can vary between states
- Encourage your financial team to consistently conduct book checks for errors
When Calculating Use Tax:
Use tax affects items you purchase to use in your manufacturing process. As with sales tax, product taxability is based on which state you are in. Manufacturers must ensure accuracy for their own use taxability on products consumed or services purchased. Once use and taxability have been determined, you must file a use tax return in a timely manner using the correct use tax for each item.
Help your team identify use tax situations:
- Providing training to your production team on what steps can incur use tax
- Create checks lists of possible use tax-affected items for your team to compare against routine checks
- Provide training to financial team members on when to file use tax returns and at what rates
When Determining Nexus:
Nexus isn’t always cut and dried. Installation and repair services performed by your manufacturing company or a third-party vendor can create a nexus in some states. Knowing what services create nexus, and under what circumstances, is important when complying with any potential liability to collect and remit sales and use tax. When entering new states with any type of business activity, it is best to do your research and determine how that activity will affect your tax liability.
Create routines that help your team manage nexus creation:
- Provide training to sales team members on how business actions can affect nexus
- Create checklists for employees to fill out before conducting new business
- Create a list for teams of what states you currently have nexus in
- Periodically check for nexus requirement changes
When Performing Drop Shipping:
A distributor or wholesaler will sometimes request the manufacturer to drop ship their product to either their location or sometimes to their customer’s location. If you are shipping direct to the distributor, and the product is considered tax-exempt for resale, then no tax is required. However, if you are shipping directly to the customer, the sale is complicated by possible nexus and can sometimes require sales tax collection or at the very least documentation. Some states only tax a portion of the freight cost, others tax the whole amount, and some don’t tax it at all.
Steps that can help your team manage drop shipping tax liability:
- Provide training to employees on state freight cost procedures
- Have your tax department maintain changing freight cost taxes
- Create checklists to help identify liability situations
Along with these tips, Sales Tax DataLINK provides a number of services that can help streamline your tax processes. To sign up for a free evaluation and see how we could help your business, contact us today.